I’ve posted Entry #391 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Fama Gave Us a Powerful Engine in a Good-Looking Car, Shiller Provided the Brakes.
Juicy Excerpt: In other markets, there are natural limits on how high prices can go. The people who sell us sweaters and bananas and batteries would love to see the prices charged for those items go up and up and up. But the reality is that if any seller of sweaters or bananas or batteries gives in to the temptation to charge a very high price, he will soon find himself out of business. In other markets, there are always pressures pulling prices down to counter the pressures pulling prices up. In other markets prices are set through a battle between the sellers who want them to rise as high as possible and the buyers who want them to drop as low as possible.
It doesn’t work that way in the stock market. In the stock market, buyers love, love, love high prices. When stock prices go up, we all pay more for the shares we buy each month. But we tend not to focus on that side of the story. We are happy to pay higher prices for the new shares we purchase because it means that the shares that we have held for a long time are priced higher too. The stock market is the only market that I can think of in which both buyers and sellers possess the psychology of sellers. Both buyers and sellers like to see prices headed up, up, and up some more. There is no natural resistance to higher prices in the stock market.
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